Charlie's Holdings, Inc. - Quarter Report: 2018 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2018
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
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For the transition period from _________ to
_________
Commission file number 001-32420
TRUE DRINKS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Nevada
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84-1575085
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(State or Other Jurisdiction of Incorporation
or Organization)
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(IRS Employer Identification No.)
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2 Park Plaza, Suite 1200, Irvine, CA 92614
(Address of Principal Executive Offices)
(949) 203-3500
(Registrant’s Telephone Number, Including Area
Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No
[ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
[X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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[ ]
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Accelerated filer
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[ ]
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Non-accelerated filer
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[ ]
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Smaller reporting company
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[X]
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Emerging growth company
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[ ]
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-12 of the Exchange Act). Yes
[ ] No [X]
The number of shares of Common Stock, $0.001 par value per share,
outstanding on September 24, 2018 was 237,665,177.
TRUE DRINKS HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2018
INDEX
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PART I.
FINANCIAL INFORMATION
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Page
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1
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2
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3
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4
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19
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26
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26
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PART II.
OTHER INFORMATION
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27
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27
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27
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27
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27
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27
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27
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SIGNATURES
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28
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-i-
ITEM 1. FINANCIAL STATEMENTS
TRUE DRINKS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30,
2018
(Unaudited)
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December 31,
2017
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ASSETS
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Current
Assets:
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Cash
and cash equivalents
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$29,552
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$76,534
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Accounts
receivable, net
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21,033
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55,469
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Inventory,
net
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14,556
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1,176,101
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Prepaid
expenses and other current assets
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12,712
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80,918
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Total
Current Assets
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77,853
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1,389,022
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Property and Equipment, net
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3,428
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5,896
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Goodwill
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3,474,502
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3,474,502
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Total Assets
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$3,555,783
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$4,869,420
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current
Liabilities:
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Accounts
payable and accrued expenses
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$807,337
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$7,432,799
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Debt,
Short-term
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2,071,390
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764,563
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Derivative
liabilities
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3,492,017
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8,337
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Total
Current Liabilities
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6,370,744
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8,205,699
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Debt,
long-term
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5,296,201
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2,050,000
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Total
liabilities
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11,666,945
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10,255,699
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Commitments and
Contingencies (Note
5)
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Stockholders’
Deficit:
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Common
Stock, $0.001 par value, 300,000,000 shares authorized, 228,460,602
and 218,151,591 shares issued and outstanding at June 30, 2018 and
December 31, 2017, respectively
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228,461
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218,152
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Preferred
Stock – Series B (liquidation preference of $4 per share),
$0.001 par value, 2,750,000 shares authorized, 1,285,585 shares
issued and outstanding at June 30, 2018 and December 31,
2017
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1,285
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1,285
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Preferred
Stock – Series C (liquidation preference $100 per share),
$0.001 par value, 200,000 shares authorized, 105,704 shares
issued and outstanding at June 30, 2018 and December 31,
2017
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106
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106
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Preferred
Stock – Series D (liquidation preference $100 per share),
$0.001 par value, 50,000 shares authorized, 34,250 shares
issued and outstanding at June 30, 2018 and December 31,
2017
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34
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34
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Additional
paid in capital
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43,699,527
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42,635,493
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Accumulated
deficit
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(52,040,575)
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(48,241,349)
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Total
Stockholders’ Deficit
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(8,111,162)
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(5,386,279)
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Total Liabilities and Stockholders’ Deficit
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$3,555,783
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$4,869,420
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
-1-
TRUE DRINKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three
Months Ended
June
30,
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Six
Months Ended
June
30,
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2018
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2017
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2018
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2017
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Net
Sales
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$1,582,752
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$1,934,953
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$1,884,378
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$3,464,705
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Cost
of Sales
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863,470
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1,225,253
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1,172,975
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2,198,865
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Gross
Profit
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719,282
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709,700
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711,403
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1,265,840
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Operating
Expenses
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Selling and
marketing
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207,433
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1,477,154
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383,573
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3,060,685
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General and
administrative
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9,924,373
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1,617,842
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10,797,372
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3,035,750
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Total operating
expenses
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10,131,806
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3,094,996
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11,180,945
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6,096,435
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Operating
Loss
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(9,412,524)
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(2,385,296)
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(10,469,542)
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(4,830,595)
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Other
(Expense) Income
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Change in fair
value of derivative liabilities
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6,270,623
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(4,168)
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6,270,623
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2,239,350
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Interest
expense
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(169,093)
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(24,432)
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(233,360)
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(44,917)
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Other income
(expense)
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224,153
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-
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633,053
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(48,008)
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6,325,683
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(28,600)
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6,670,316
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2,146,425
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NET
LOSS
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(3,086,841)
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(2,413,896)
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(3,799,226)
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(2,684,170)
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Declared
dividends on Preferred Stock
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64,993
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65,362
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129,272
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130,006
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Net
loss attributable to common stockholders
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$(3,151,834)
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$(2,479,258)
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$(3,928,498)
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$(2,814,176)
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Loss
per common share, basic and diluted
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$(0.01)
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$(0.01)
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$(0.02)
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$(0.02)
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Weighted
average common shares outstanding, basic and diluted
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223,759,041
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202,261,571
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222,202,554
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165,639,474
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
-2-
TRUE DRINKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended
June
30,
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2018
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2017
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CASH
FLOWS FROM OPERATING ACTIVITIES
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Net
loss
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$(3,799,226)
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$(2,684,170)
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Adjustments to
reconcile net loss to net cash used in operating
activities
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Depreciation
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2,468
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2,667
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Amortization
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-
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60,000
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Accretion of debt
discount
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145,951
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-
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Provision for bad
debt expense
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26,203
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(18,204)
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Provision for
inventory losses
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-
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(110,000)
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Change in estimated
fair value of derivative liabilities
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(6,270,623)
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(2,239,350)
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Fair value of stock
issued for services
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-
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360,500
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Fair value of stock
issuable for services
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9,754,303
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-
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Stock based
compensation
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259,491
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163,736
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Change in operating
assets and liabilities:
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Accounts
receivable, net
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8,233
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(1,083,906)
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Inventory,
net
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(274,568)
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67,282
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Prepaid expenses
and other current assets
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68,206
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(156,696)
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Accounts payable
and accrued expenses
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(2,834,207)
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1,615,391
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Net
cash used in operating activities
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(2,913,769)
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(4,022,750)
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CASH
FLOWS FROM FINANCING ACTIVITIES
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Proceeds from
issuance of Series D Preferred Stock, net
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-
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4,020,000
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Principal
repayments on debt
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-
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(151,188)
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Net borrowings on
line-of-credit facility
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10,437
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161,549
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Proceeds from notes
payable
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2,856,350
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-
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Net
cash provided by financing activities
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2,866,787
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4,030,361
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NET
(DECREASE) INCREASE IN CASH
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(46,982)
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7,611
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CASH AND CASH EQUIVALENTS - beginning of
period
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$76,534
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$224,876
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CASH AND CASH EQUIVALENTS - end of
period
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$29,552
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$232,487
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SUPPLEMENTAL
DISCLOSURES
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Interest paid in
cash
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$432
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$45,022
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Non-cash financing
and investing activities:
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Conversion of
preferred stock to common stock
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$-
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$3,732
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Debt discount
recorded
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$2,250,250
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$-
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Dividends paid in
common stock
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$129,987
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$130,723
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Dividends declared
but unpaid
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$129,272
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$130,006
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Warrants issued in
connection with Preferred Offering
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$-
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$2,381,931
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Warrants exchanged
for common stock
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$-
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$5,863,278
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Restricted stock
issued
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$5,000
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$-
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Notes payable
issued in exchange for accounts payable
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$3,790,540
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$1,049,564
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Warrants exchanged
for common stock
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$-
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$5,863,278
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Derecognition of
debt discount
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$1,436,133
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$-
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Sale of inventory
in exchange for note payable
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$1,436,113
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$-
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
-3-
TRUE DRINKS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
June 30, 2018
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Business
Overview
True Drinks
Holdings, Inc. (the “Company,” “us” or “we”) was incorporated in the state of Nevada
in January 2001 and is the holding company for True Drinks, Inc.
(“True Drinks”), a beverage company incorporated in the
state of Delaware in January 2012 that specialized in all-natural,
vitamin-enhanced drinks. Previously, our primary business was the
development, marketing, sale and distribution of our flagship
product, AquaBall® Naturally Flavored Water, a zero-sugar,
zero-calorie, preservative-free, vitamin-enhanced, naturally
flavored water drink. We distributed AquaBall® nationally
through select retail channels, such as grocery stores, mass
merchandisers, drug stores and online. Although,
as noted below, we have discontinued the production, distribution
and sale of AquaBall®, we continue to market and distribute Bazi® All
Natural Energy, a liquid nutritional supplement drink, which is
currently distributed online and through our existing database of
customers.
Our principal place of business is 2 Park Plaza,
Suite 1200, Irvine, California 92614. Our telephone number is (949)
203-3500. Our corporate website address is
http://www.truedrinks.com. Our common stock, par value $0.001 per
share (“Common
Stock”), is currently
listed for quotation on the OTC Pink Marketplace under the symbol
“TRUU.”
Recent Developments
Cessation of Production of AquaBall®, and Management’s
Plan
During
the first quarter of 2018, due to the weakness in the sale of the
Company’s principal product, AquaBall® Naturally
Flavored Water, and continued substantial operating losses, the
Company’s Board of Directors determined to discontinue the
production of AquaBall®, and, as set forth below, terminate
the bottling agreement by and between Niagara Bottling LLC, the
Company’s contract bottling manufacturer (“Bottler” or “Niagara”), and True Drinks (the
“Bottling
Agreement”). In addition, the Company notified Disney
Consumer Products, Inc. (“Disney”) of the Company’s
desire to terminate its licensing agreement with Disney
(“Disney
License”), pursuant to which the Company was able to
feature various Disney characters on each AquaBall® bottle. As
a result of management’s decision, and the Company’s
failure to pay certain amounts due Disney under the terms of the
Disney License, the Disney License terminated, and Disney claimed
amounts due of approximately $178,000, net of $378,000 drawn from
an irrevocable letter of credit posted in connection with the
execution of the Disney License. In addition, Disney sought
additional payments for minimum royalty amounts required to be paid
Disney through the remainder of the term of the Disney License. On
July 17, 2018 the Company and Disney entered into a settlement and
release whereby in exchange for a payment to Disney of $42,000, the
parties agreed to release each other from any and all claims
related to the Disney License.
In April 2018, the
Company sold its remaining AquaBall® inventory to Red Beard
Holdings, LLC (“Red
Beard”), the Company’s largest shareholder, for
an aggregate purchase price of approximately $1.44 million (the
“Purchase
Price”). As payment for the Purchase Price, the
principal amount of the senior secured convertible promissory note
issued to Red Beard by the Company in the principal amount of $2.25
million (the “Red Beard
Note”) was reduced by the Purchase Price, resulting in
approximately $814,000 owed to Red Beard under the terms of the Red
Beard Note as of April 5, 2018.
The
Company has reduced its staff to one employee, has taken other
steps to minimize general, administrative and other operating
costs, while maintaining only those costs and expenses necessary to
maintain sales of Bazi and otherwise continue operations while the
Board of Directors and the Company’s principal stockholder
explore corporate opportunities, as more particularly described
below. Management has also worked to reduce accounts payable by
negotiating settlements with creditors, including Disney, utilizing
advances from Red Beard aggregating approximately $305,000 since
June 30, 2018, and is currently negotiating with its remaining
creditors to settle additional accounts payable.
-4-
Management is
currently exploring, together with its largest shareholder,
available options to maximize the value of AquaBall® as well
as Bazi®, which may include entering into a license or similar
agreement with a third party to continue the production, marketing
and sale of AquaBall® and Bazi®. In addition, although no
assurances can be given, management is actively exploring, together
with its largest shareholder, opportunities to engage in one or
more strategic or other transactions that would maximize the value
of the Company as a fully reporting public operating company with a
focus on developing consumer brands,
as well as restructuring its preferred capital and indebtedness in
order to position the Company as an attractive candidate for such
transactions.
Termination of Bottling Agreement and Issuance of
Notes
On
April 5, 2018 (the “Effective Date”), True Drinks
settled all amounts due the Bottler under the terms of the Bottling
Agreement (the “Settlement”). As of the Effective
Date, the damage amount claimed by the Bottler under the Bottling
Agreement was $18,480,620, which amount consisted of amounts due to
the Bottler for product as well as amounts due for True
Drink’s failure to meet certain minimum requirements under
the Bottling Agreement (the “Outstanding Amount”).
Concurrently, an affiliate of Red Beard and the Bottler agreed to
terminate a personal guaranty of Red Beard’s obligations
under the Bottling Agreement in an amount not to exceed $10.0
million (the “Affiliate
Guaranty”) (the Bottling Agreement and the Affiliate
Guaranty are hereinafter referred to as the “2015 Agreements”).
Under
the terms of the Settlement, in exchange for the termination of the
2015 Agreements, the Bottler agreed to accept, among other things:
(i) a promissory note in the principal amount of $4,644,906 (the
“Principal
Amount”), with a 5% per annum interest rate, to be
compounded, annually (“Note
One”), (ii) a promissory note with a principal amount
equal to the Outstanding Amount (“Note Two”), and (iii) a cash
payment of $2,185,158 (the “Cash Payment”).
The
Principal Amount and all interest payments due under Note One shall
be due and payable to the Bottler in full on or before the December
31, 2019 (the “Note
Payment”). True Drinks, the Company and Red Beard are
each jointly and severally responsible for all amounts due under
Note One; provided,
however, that in the event of a Change in Control
Transaction, as defined in Note One, Red Beard will be the sole
obligor for any amounts due under Note One.
Note
Two shall have no force or effect except under certain conditions
and shall be reduced by any payments made to the Bottler under the
terms of the Settlement. True Drinks and the Company shall be
jointly and severally responsible for all amounts due, if any,
under Note Two, which shall automatically expire and terminate on
December 31, 2019.
In
consideration for the guarantee of the Company’s obligations
in connection with the Settlement, including as a joint and several
obligor under the terms of Note One, the Company is obligated to
issue Red Beard 348,367,950 shares of the Company’s Common
Stock (the “Shares”), which Shares shall be
issued at such time as the Company has amended its Articles of
Incorporation to increase the number of authorized shares of Common
Stock from 300.0 million to at least 2.0 billion (the
“Amendment”),
but in no event later than September 30, 2018. As a condition to
the Company’s obligation to issue the Shares, Red Beard
shall, and shall cause its affiliates to, execute a written consent
of shareholders to approve the Amendment, and to take such other
action as reasonably requested by the Company to effect the
Amendment.
In
connection with the Settlement, and in order to make the Cash
Payment described above, the Company issued the Red Beard Note to
Red Beard, which Red Beard Note accrues interest at a rate of 5%
per annum. In May 2018, as a result of the sale to Red Beard of the
Company’s remaining AquaBall® inventory, the principal
amount of the Red Beard Note was reduced by the Purchase
Price.
Pursuant to the
terms of the Red Beard Note, Red Beard shall have the right, at its
sole option, to convert the outstanding balance due into that
number of fully paid and non-assessable shares of the
Company’s Common Stock equal to the outstanding balance
divided by $0.005 (the “Conversion Option”); provided, however, that the Company
shall have the right, at its sole option, to pay all or a portion
of the accrued and unpaid interest due and payable to Red Beard
upon its exercise of the Conversion Option in cash. Such Conversion
Option shall not be exercisable unless and until such time as the
Company has filed the Amendment with the Nevada Secretary of
State.
All
outstanding principal and interest due under the terms of the Red
Beard Note shall be due and payable to Red Beard in full on or
before December 31, 2019 and is secured by a continuing security
interest in substantially all of the Company’s
assets.
-5-
Basis of
Presentation and Going
Concern
The accompanying condensed consolidated balance
sheet as of December 31, 2017, which has been derived from audited
financial statements included in the Company’s Form 10-K for
the year ended December 31, 2017, and the accompanying interim
condensed consolidated financial statements have been prepared by
management pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”) for interim financial reporting. These
interim condensed consolidated financial statements are unaudited
and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments and accruals)
necessary to fairly present the Company’s financial
condition, results of operations and cash flows as of and for the
periods presented in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”). Operating results for the six-month
period ended June 30, 2018 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2018,
or for any other interim period during such year. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been omitted in
accordance with the rules and regulations of the SEC, although the
Company believes that the disclosures made are adequate to make the
information not misleading. The accompanying condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in
the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2017 filed with the SEC on June 26,
2018.
The
accompanying condensed consolidated financial statements have been
prepared in conformity with GAAP, which contemplates continuation
of the Company as a going concern. As of and for the six months
ended June 30, 2018, the Company had a net loss of $3,799,226
negative working capital of $6,292,891, and an accumulated deficit
of $52,040,575. The Company had $29,552 in cash at June 30, 2018.
The Company currently requires additional capital to execute its
business plan, marketing and operating plan, and therefore sustain
operations, which capital may not be available on favorable terms,
if at all. The accompanying condensed consolidated financial
statements do not include any adjustments that will result if the
Company is unable to secure the capital necessary to execute its
business, marking or operating plan.
Principles of Consolidation
The
accompanying condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries True
Drinks, Inc., Bazi, Inc. and GT Beverage Company, LLC. All
inter-company accounts and transactions have been eliminated in the
preparation of these condensed consolidated financial
statements.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates made by management
include, among others, derivative liabilities, provision for losses
on accounts receivable, allowances for obsolete and slow-moving
inventory, stock compensation, deferred tax asset valuation
allowances, and the realization of long-lived and intangible
assets, including goodwill. Actual results could differ from those
estimates.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09, Revenue from Contracts with Customers
(Topic 606), (ASC 606). The underlying principle of ASC 606 is to
recognize revenue to depict the transfer of goods or services to
customers at the amount expected to be collected. ASC 606 creates a
five-step model that requires entities to exercise judgment when
considering the terms of contract(s), which includes (1)
identifying the contract(s) or agreement(s) with a customer, (2)
identifying our performance obligations in the contract or
agreement,(3) determining the transaction price, (4) allocating the
transaction price to the separate performance obligations, and (5)
recognizing revenue as each performance obligation is satisfied.
The Company adopted ASC 606 effective January 1, 2018, and adoption
of such standard had no effect on previously reported
balances.
Recognition of sales of the products sold by the Company
since the adoption of the new standard has had no quantitative
effect on the financial statements. However, the guidance requires
additional disclosures to help users of financial statements better
understand the nature, amount, timing, and uncertainty of revenue
that is recognized.
-6-
The Company previously recognized and continues to recognize
revenue when risk of loss transferred to our customers and
collection of the receivable was reasonably assured, which
generally occurs when the product is shipped. A product is not
shipped without an order from the customer and credit acceptance
procedures performed.
Under the new guidance, revenue is recognized when control of
promised goods or services is transferred to our customers, in an
amount that reflects the consideration we expect to be entitled to
in exchange for those goods or services. The Company does not have
any significant contracts with customers requiring performance
beyond delivery. All orders have a written purchase order that is
reviewed for credit worthiness, pricing and other terms before
fulfillment begins. Shipping and handling activities are performed
before the customer obtains control of the goods and therefore
represent a fulfillment activity rather than a promised service to
the customer. Revenue and costs of sales are recognized when placed
under the customer’s control. Control of the products that we
sell, transfers to the customer upon shipment from our facilities,
and the Company’s performance obligations are satisfied at
that time.
All products sold by the Company are beverage products. The
products are offered for sale as finished goods only, and there are
no performance obligations required post-shipment for customers to
derive the expected value from them. Contracts with customers
contain no incentives or discounts that could cause revenue to be
allocated or adjusted over time.
The Company does not allow for returns, although we do for
damaged products, if support for the damage that occurs
pre-fulfillment is provided, returns are permitted. Damage product
returns have been insignificant. Due to the insignificant amount of
historical returns as well as the standalone nature of our products
and assessment of performance obligations and transaction pricing
for our sales contracts, we do not currently maintain a contract
asset or liability balance at this time for obligations. We assess
our contracts and the reasonableness of our conclusions on a
quarterly basis
Cash and Cash Equivalents
The Company considers all highly liquid
investments with original maturities of three months or less, to be
cash equivalents. The Company maintains cash with high credit
quality financial institutions. At certain times, such amounts may
exceed Federal Deposit Insurance Corporation
(“FDIC”) insurance limits. The Company has not
experienced any losses on these amounts.
Accounts Receivable
The
Company records its trade accounts receivable at net realizable
value. This value includes an appropriate allowance for estimated
sales returns and allowances, and uncollectible accounts to reflect
any losses anticipated and charged to the provision for doubtful
accounts. Credit is extended to our customers based on an
evaluation of their financial condition; generally, collateral is
not required. An estimate of uncollectible amounts is made by
management based upon historical bad debts, current customer
receivable balances, age of customer receivable balances, the
customer’s financial condition and current economic trends,
all of which are subject to change. Actual uncollected amounts have
historically been consistent with the Company’s expectations.
Receivables are charged off against the reserve for doubtful
accounts when, in management’s estimation, further collection
efforts would not result in a reasonable likelihood of receipt, or
later as proscribed by statutory regulations.
Concentrations
The
Company has no significant off-balance sheet concentrations of
credit risk such as foreign exchange contracts, options contracts
or other foreign hedging arrangements. The Company maintains the
majority of its cash balances with two financial institutions.
There are funds in excess of the federally insured amount, or that
are subject to credit risk, and the Company believes that the
financial institutions are financially sound and the risk of loss
is minimal.
Prior to the termination of the Bottling Agreement
in early 2018, all production of AquaBall® was done by
Niagara. Niagara handled all aspects of production, including the
procurement of all raw materials necessary to produce
AquaBall®. We utilized two facilities to handle any necessary
repackaging of AquaBall® into six packs or 15-packs for club
customers.
-7-
During
the second quarter of 2018, we relied significantly on one supplier
for 100% of our purchases of certain raw materials for Bazi®.
Bazi, Inc. has sourced these raw materials from this supplier since
2007 and does not anticipate any issues with the supply of these
raw materials.
No
customer made up more than 10% of accounts receivable at June 30,
2018 or December 31, 2017. One customer made up approximately 95%
of net sales for the three-month period ended June 30, 2018 and
June 30, 2017.
A significant portion of our revenue during the
quarters ended June 30, 2018 and 2017 came from sales of
AquaBall®
Naturally Flavored Water.
For the
three months ended June 30, 2018 and 2017, sales of
AquaBall® accounted for 98% and 98% of the Company’s
total revenue, respectively. For the six months ended June
30, 2018 and
2017, sales of
AquaBall® accounted for 95% and 97% of the Company’s
total revenue, respectively.
Inventory
As
of June 30, 2018, the Company purchased for resale a
vitamin-enhanced flavored water beverage and a liquid dietary
supplement.
Inventories
are stated at the lower of cost (based on the first-in, first-out
method) or net realizable value. Cost includes shipping and
handling fees and costs, which are subsequently expensed to cost of
sales. The Company provides for estimated losses from obsolete or
slow-moving inventories and writes down the cost of inventory at
the time such determinations are made. Reserves are estimated based
on inventory on hand, historical sales activity, industry trends,
the retail environment and the expected net realizable
value.
The
Company maintained inventory reserves of $12,858 and $93,000 as of
June 30, 2018 and December 31, 2017, respectively. The inventory
reserve is related to our current inventory as of June 30, 2018 and
December 31, 2017 against our forecasted inventory movement until
such inventory must be retired due to aging.
Inventory
is comprised of the following:
|
|
June 30,
2018
|
December 31,
2017
|
|
Purchased
materials
|
$-
|
$29,012
|
|
Finished
goods
|
27,414
|
1,240,089
|
|
Allowance
for obsolescence reserve
|
(12,858)
|
(93,000)
|
|
Total
|
$14,556
|
$1,176,101
|
Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. For purposes of evaluating the
recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows estimated to be
generated by the asset. No impairment was deemed necessary during
the quarter ended June 30, 2018.
Goodwill and Identifiable Intangible Assets
As
a result of acquisitions, we have goodwill and other identifiable
intangible assets. In business combinations, goodwill is generally
determined as the excess of the fair value of the consideration
transferred, plus the fair value of any noncontrolling interests in
the acquiree, over the fair value of the net assets acquired and
liabilities assumed as of the acquisition date. Accounting for
acquired goodwill in accordance with GAAP requires significant
judgment with respect to the determination of the valuation of the
acquired assets and liabilities assumed in order to determine the
final amount of goodwill recorded in business combinations.
Goodwill is not amortized, rather, it is evaluated for impairment
on an annual basis, or more frequently when a triggering event
occurs between annual tests that would more likely than not reduce
the fair value of the reporting unit below its carrying value. Such
impairment evaluations compare the reporting unit’s estimated
fair value to its carrying value.
-8-
Identifiable
intangible assets consist primarily of customer relationships
recognized in business combinations. Identifiable intangible assets
with finite lives are amortized over their estimated useful lives,
which represent the period over which the asset is expected to
contribute directly or indirectly to future cash flows.
Identifiable intangible assets are reviewed for impairment whenever
events and circumstances indicate the carrying value of such assets
or liabilities may not be recoverable and exceed their fair value.
If an impairment loss exists, the carrying amount of the
identifiable intangible asset is adjusted to a new cost basis. The
new cost basis is amortized over the remaining useful life of the
asset. Tests for impairment or recoverability require significant
management judgment, and future events affecting cash flows and
market conditions could adversely impact the valuation of these
assets and result in impairment losses.
Beneficial
Conversion Feature of Convertible Debt
The Company accounts for convertible debt in
accordance with the guidelines established by FASB ASC 470-20,
"Debt with Conversion and Other Options ". The Beneficial
Conversion Feature (“BCF”) gives the debt holder the
ability to convert debt into common stock at a price per share that
is less than the trading price to the public on the date of the
debt. The beneficial value is calculated as the intrinsic value
(the market price of the stock at the commitment date in excess of
the conversion rate) of the beneficial conversion feature of the
debt, and is recorded as a discount to the related debt and an
addition to additional paid in capital. The discount is amortized
over the remaining outstanding period of related debt using the
interest method.
Income Taxes
As
the Company’s calculated provision (benefit) for income tax
is based on annual expected tax rates, no income tax expense was
recorded for the three-month or six-month periods ended June 30,
2018 and 2017. At June 30, 2018, the Company had tax net operating
loss carryforwards and a related deferred tax asset, which had a
full valuation
allowance.
Stock-Based Compensation
For
the six-month periods ended June 30, 2018 and 2017, general and
administrative expenses included stock based compensation expense
of $259,491 and $163,736, respectively.
The Company uses a Black-Scholes option-pricing
model (the “Black-Scholes
Model”) to estimate the
fair value of outstanding stock options and warrants not accounted
for as derivatives. The use of a valuation model requires the
Company to make certain assumptions with respect to selected model
inputs. Expected volatility is calculated based on the historical
volatility of the Company’s stock price over the contractual
term of the option or warrant. The expected life is based on the
contractual term of the option or warrant and expected exercise
and, in the case of options, post-vesting employment termination
behavior. Currently, our model inputs are based on the simplified
approach provided by Staff Accounting Bulletin
(“SAB”) 110. The risk-free interest rate is based
on U.S. Treasury zero-coupon issues with a remaining term equal to
the expected life assumed at the date of the
grant.
The
fair value for restricted stock awards is calculated based on the
stock price on the date of grant.
Fair Value of Financial Instruments
The
Company does not have any assets or liabilities carried at fair
value on a recurring or non-recurring basis, except for derivative
liabilities.
The
Company’s financial instruments consist of cash, accounts
receivable, accounts payable and accrued expenses, and debt.
Management believes that the carrying amount of these financial
instruments approximates their fair values, due to their relatively
short-term nature.
-9-
Derivative Instruments
A derivative is an instrument whose value is
“derived” from an underlying instrument or index such
as a future, forward, swap, option contract, or other financial
instrument with similar characteristics, including certain
derivative instruments embedded in other contracts
(“embedded
derivatives”) and for
hedging activities. As a matter of policy, the Company does not
invest in financial derivatives or engage in hedging transactions.
However, the Company has entered into complex financing
transactions that involve financial instruments containing certain
features that have resulted in the instruments being deemed
derivatives or containing embedded derivatives. Derivatives and
embedded derivatives, if applicable, are measured at fair value
using the binomial lattice- (“Binomial
Lattice”) pricing model
and marked to market and reflected on our consolidated statement of
operations as other (income) expense at each reporting
period.
Basic and Diluted (loss) Income Per Share
Our computation of earnings per share
(“EPS”) includes basic and diluted EPS. Basic EPS
is measured as the (loss) income available to common stockholders
divided by the weighted average common shares outstanding for the
period. Diluted (loss) income per share reflects the potential
dilution, using the treasury stock method, that could occur if
securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of
common stock that then shared in the (loss) income of the Company
as if they had been converted at the beginning of the periods
presented, or issuance date, if later. In computing diluted (loss)
income per share, the treasury stock method assumes that
outstanding options and warrants are exercised and the proceeds are
used to purchase common stock at the average market price during
the period. Options and warrants may have a dilutive effect under
the treasury stock method only when the average market price of the
common stock during the period exceeds the exercise price of the
options and warrants. Potential common shares that have an
antidilutive effect (i.e., those that increase income per share or
decrease loss per share) are excluded from the calculation of
diluted EPS.
(Loss) income per common share is computed by
dividing net (loss) income by the weighted average number of shares
of common stock outstanding during the respective periods. Basic
and diluted (loss) per common share is the same for periods in
which the Company reported an operating loss because all converted
preferred shares, warrants and stock options outstanding are
anti-dilutive. At June 30, 2018 and 2017, we excluded 116,674,110
and 124,347,592, respectively,
shares of Common Stock equivalents, as
their effect would have been anti-dilutive.
Recent Accounting Pronouncements
Except
as noted below, the Company has reviewed all recently issued, but
not yet effective accounting pronouncements and has concluded that
there are no recently issued, but not yet effective pronouncements
that may have a material impact on the Company’s future
financial statements.
On
February 25, 2016, the FASB issued ASU 2016-2,
“Leases” (Topic 842), which is intended to improve
financial reporting for lease transactions. This ASU will require
organizations that lease assets, such as real estate, airplanes and
manufacturing equipment, to recognize on their balance sheet the
assets and liabilities for the rights to use those assets for the
lease term and obligations to make lease payments created by those
leases that have terms of greater than 12 months. The
recognition, measurement, and presentation of expenses and cash
flows arising from a lease by a lessee primarily will depend on its
classification as finance or operating lease. This ASU will also
require disclosures to help investors and other financial statement
users better understand the amount and timing of cash flows arising
from leases. These disclosures will include qualitative and
quantitative requirements, providing additional information about
the amounts recorded in the financial statements. The ASU is
effective for the Company for the year ending December 31, 2019 and
interim reporting periods within that year, and early adoption is
permitted. Management has not yet determined the effect of this ASU
on the Company’s financial
statements.
-10-
In August 2016, FASB issued ASU No.
2016-15, “Statement of Cash Flows: Classification of
Certain Cash Receipts and Cash
Payments,” (“ASU 2016-15”) which eliminates the diversity in
practice related to the classification of certain cash receipts and
payments. ASU 2016-15 designates the appropriate cash flow
classification, including requirements to allocate certain
components of these cash receipts and payments among operating,
investing and financing activities. The retrospective transition
method, requiring adjustment to all comparative periods presented,
is required unless it is impracticable for some of the amendments,
in which case those amendments would be prospectively adopted as of
the earliest date practicable. The new guidance was effective for
us in the first quarter of 2018. The adoption of ASU 2016-15 did
not have a material impact on the Company’s financial
statements.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASU
2016-18”). ASU 2016-18
requires that a statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash
equivalents. ASU 2016-18 was effective for us as of January 1, 2018.
The adoption of this update did not have a material impact on the
Company’s financial statements.
NOTE 2 — SHAREHOLDERS’ EQUITY
Securities
Our authorized capital
stock currently consists of 300.0 million shares of Common Stock,
and 5.0 million shares of preferred stock, $0.001 par value
per share, of which 2.75 million shares have been designated as
Series B Convertible Preferred Stock (“Series
B Preferred”),
200,000 shares have been designated as Series C Convertible
Preferred Stock (“Series
C Preferred”) and 50,000
shares have been designated as Series D Convertible Preferred Stock
(“Series
D Preferred”). Below is a
summary of the rights and preferences associated with each type of
security.
Common
Stock. The holders of Common
Stock are entitled to receive, when and as declared by the Board of
Directors, dividends payable either in cash, in property or in
shares of Common Stock of the Company. Dividends have no cumulative
rights and dividends will not accumulate if the Board of Directors
does not declare such dividends.
Series B
Preferred. Each share of the
Company’s Series B Preferred
Convertible Stock (“Series
B Preferred”) has
a stated value of $4.00 per share (“Stated
Value”) and accrued
annual dividends equal to 5% of the Stated Value, payable by the
Company in quarterly installments, in either cash or shares of
Common Stock. Each share of Series B Preferred is convertible, at
the option of the holder, into that number of shares of Common
Stock equal to the Stated Value, divided by $0.25 per share (the
“Series B Conversion
Shares”). The Company
also has the option to require the conversion of the Series B
Preferred into Series B Conversion Shares in the event: (i) there
were sufficient authorized shares of Common Stock reserved as
Series B Conversion Shares; (ii) the Series B Conversion Shares
were registered under the Securities Act of 1933, as amended (the
“Securities
Act”), or the Series B
Conversion Shares were freely tradable, without restriction, under
Rule 144 of the Securities Act; (iii) the daily trading volume of
the Company's Common Stock, multiplied with the closing price,
equaled at least $250,000 for 20 consecutive trading days; and (iv)
the average closing price of the Company's Common Stock was at
least $0.62 per share for 10 consecutive trading
days.
During
the three months ended June 30, 2018, the Company declared $64,993
in dividends on outstanding shares of its Series B Preferred.
During the six months ended June 30, 2018, the Company declared
$129,272 in dividends on outstanding shares of its Series B
Preferred. As of June 30, 2018, there remained $64,993 in
cumulative unpaid dividends on the Series B Preferred.
Series
C Preferred. Each share of Series
C Preferred has a stated value of $100 per share, and as of the
quarter ended June 30, 2018, was convertible, at the option of each
respective holder, into that number of shares of Common Stock equal
to $100, divided by $0.15 per share (the “Series
C Conversion Shares”). The Company
also has the option to require conversion of the Series C Preferred
into Series C Conversion Shares in the event: (i) there are
sufficient authorized shares of Common Stock reserved as Series C
Conversion Shares; (ii) the Series C Conversion Shares are
registered under the Securities Act of 1933, or the Series C
Conversion Shares are freely tradable, without restriction, under
Rule 144 of the Securities Act; and (iii) the average closing price
of the Company’s Common Stock is at least $0.62 per share for
10 consecutive trading day.
-11-
During the three months ended June 30, 2018, and in connection with
dilution resulting from the Niagara Settlement, the conversion
price was reset to $0.025 per share.
Series D
Preferred. Each share of Series
D Preferred has a stated value of $100 per share, and, following
the expiration of the 20 day calendar day period set forth in Rule
14c-2(b) under the Exchange Act, commencing upon the distribution
of an Information Statement on Schedule 14C to the Company’s
stockholders, each share of Series D Preferred is convertible, at
the option of each respective holder, into that number of shares of
the Company’s Common Stock equal to the stated value, divided
by $0.15 per share (the “Series D Conversion
Shares”). The Certificate
of Designation also gives the Company the option to require the
conversion of the Series D Preferred into Series D Conversion
Shares in the event: (i) there are sufficient authorized shares of
Common Stock reserved as Series D Conversion Shares; (ii) the
Series D Conversion Shares are registered under the Securities Act,
or the Series D Conversion Shares are freely tradable, without
restriction, under Rule 144 of the Securities Act; and (iii) the
average closing price of the Company’s Common Stock is at
least $0.62 per share for 10 consecutive trading
days.
During the three months ended June 30, 2018, and in connection with
dilution resulting from the Niagara Settlement, the conversion
price was reset to $0.025 per share.
Issuances of Securities
Between February 8, 2017 and August 21, 2017, the
Company issued an aggregate total of 45,625 shares of Series D
Preferred for $100 per share in a series of private placement
transactions (the “Series D
Financing”). As
additional consideration, investors in the Series D Financing
received warrants to purchase up to 60,833,353 shares of Common
Stock, an amount equal to 200% of the Series D Conversion Shares
issuable upon conversion of shares of Series D Preferred purchased
under the Series D Financing, exercisable for $0.15 per share. In
accordance with the terms and conditions of the Securities Purchase
Agreement executed in connection with the Series D Financing, all
warrants issued were exchanged for shares of Common Stock pursuant
to the Warrant Exchange Program (defined below). During the year
ended December 31, 2017, 6,875 shares of Series D Preferred were
converted to Common Stock.
Beginning on February 8, 2017 the Company and
holders of outstanding Common Stock purchase warrants (the
“Outstanding
Warrants”) entered into
Warrant Exchange Agreements pursuant to which each holder agreed to
cancel their respective Outstanding Warrants in exchange for
one-half of a share of Common Stock for every share of Common Stock
otherwise issuable upon exercise of Outstanding Warrants (the
“Warrant Exchange
Program”). As of the date
of this Quarterly Report on Form 10-Q, the Company has issued
79,040,135 shares of Common Stock, in exchange for the cancellation
of 158,080,242 Outstanding Warrants.
NOTE 3 — WARRANTS AND STOCK BASED
COMPENSATION
Warrants
On July 26, 2017, the Company commenced an
offering of Senior Secured Promissory Notes (the
“Secured Notes”) in the aggregate principal amount of up
to $1.5 million to certain accredited investors (the
“Secured Note
Financing”). As
additional consideration for participating in the Secured Note
Financing, investors received five-year warrants, exercisable for
$0.15 per share, to purchase that number of shares of the
Company’s Common Stock equal to 50% of the principal amount
of the Secured Note purchased, divided by $0.15 per share. Between
July 26, 2017 and June 30, 2018, the Company offered and sold
Secured Notes in the aggregate principal amount of $2,465,000 and
issued Warrants to purchase up to 8,216,671 shares of Common Stock
to participating investors.
-12-
A
summary of the Company’s warrant activity for the six
months ended June 30, 2018 is presented below:
|
|
Warrants
Outstanding
|
Weighted Average
Exercise Price
|
|
Outstanding, December 31, 2017
|
11,982,864
|
$0.17
|
|
Granted
|
1,383,334
|
0.15
|
|
Exercised
|
-
|
-
|
|
Expired
|
(1,474,436)
|
0.32
|
|
Outstanding, March 31, 2018
|
11,891,762
|
$0.15
|
|
Granted
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Expired
|
(914,149)
|
0.15
|
|
Outstanding, June 30, 2018
|
10,977,613
|
$0.15
|
As
of June 30, 2018, the Company had the following outstanding
warrants to purchase shares of its Common Stock:
|
Warrants Outstanding
|
Weighted Average
Exercise Price Per Share
|
Weighted Average
Remaining Life (Yrs.)
|
|
10,549,980
|
$0.15
|
3.45
|
|
427,633
|
0.19
|
2.22
|
|
10,977,613
|
$0.15
|
3.40
|
Stock-Based Compensation
Non-Qualified Stock Options
During
the three and six months ended June 30, 2018, the Company granted
options to a certain employee to purchase a total of 200,000 shares
of Common Stock with an exercise price of $0.025 which expires five
years from the date of issuance. Also, during the six months ended
June 30, 2018, the company reset the exercise price and extended
the expiration date of options to certain employees and certain
members of the Company’s Board of Directors. The reset
options gave the holders the option to purchase an aggregate total
of 19,999,935 shares of common stock. The exercise prices were
reset to $0.025 per common share, and the expiration dates were
extended five years from the date of the reset. The original
exercise prices of these options were between $0.07 and $0.15 per
share, and the original expiration dates ranged from September 2021
to September 2022.
During
the three and six months ended June 30, 2018 and 2017, the Company
granted stock options to purchase an aggregate of 200,000 and
2,000,000 shares of Common Stock, respectively. The weighted
average estimated fair value per share of the stock options at
grant date was $0.008 and $0.061 per share, respectively. The value
of the options for which the exercise price was reset and the
expiration date was extended in 2018 was also $0.008 per share.
Such fair values were estimated using the Black-Scholes stock
option pricing model and the following weighted average
assumptions.
|
|
2018
|
|
Expected
life
|
30
months
|
|
Estimated
volatility
|
75%
|
|
Risk-free
interest rate
|
1.1%
|
|
Dividends
|
-
|
-13-
Stock
option activity during the six months ended June 30, 2018 is
summarized as follows:
|
|
Options
Outstanding
|
Weighted Average
Exercise Price
|
|
Options outstanding at December 31, 2017
|
41,770,782
|
$0.080
|
|
Exercised
|
-
|
-
|
|
Granted
|
200,000
|
0.025
|
|
Forfeited
|
(20,635,847)
|
0.07
|
|
Expired
|
-
|
-
|
|
Options outstanding at June 30, 2018
|
21,334,935
|
$0.030
|
Restricted Stock Awards
During
the six months ended June 30, 2018, the Company did not
grant any restricted stock awards
under the Company’s 2013 Stock Incentive Plan, as
amended. During the six months ended June 30, 2017, the
Company did not grant any restricted stock awards under the
Company’s 2013 Stock Incentive Plan.
|
|
Restricted Common Stock Awards
|
|
Outstanding, December 31, 2017
|
3,354,061
|
|
Granted
|
-
|
|
Issued
|
-
|
|
Forfeited
|
(1,854,061)
|
|
Outstanding, June 30, 2018
|
1,500,000
|
NOTE 4 — DEBT
Line-of-Credit Facility
The
Company entered into a line-of-credit agreement with a financial
institution on June 30, 2014. The terms of the agreement allow the
Company to borrow up to the lesser of $1.5 million or 85% of the
sum of eligible accounts receivables. At June 30, 2018, the total
outstanding on the line-of-credit was $21,390 and the Company did
not have any availability to borrow. The line-of-credit bears
interest at Prime rate (4.50% as of June 30, 2018) plus 4.5% per
annum, as well as a monthly fee of 0.50% on the average amount
outstanding on the line with a $2,500 minimum and is secured by the
accounts receivables that are funded against. The Company agreement
matured on July 31, 2018.
A
summary of the line-of-credit as of June 30, 2018 and December 31,
2017 is as follows:
|
|
Amount
|
|
Outstanding, December 31, 2017
|
$10,953
|
|
Net
Borrowings
|
10,437
|
|
Outstanding June 30, 2018
|
$21,390
|
Note Payable
In April 2017, the Company converted approximately
$1,088,000 of accounts payable into a secured note payable
agreement with Niagara (the “Niagara
Note”). The Niagara Note
called for monthly payments of principal and interest totaling
$25,000 through December 2017, and monthly payments of
approximately $52,000 through maturity. The note bore interest at
8% per annum, was scheduled to mature in April 2019 and was secured
by the personal guarantee which secures the Bottling Agreement. As
of the date of the Niagara Settlement described in Note 1, the
remaining balance on the Niagara Note was $854,366 and was settled
in full in exchange for a new note payable.
As of June 30, 2018, and in connection with the
Niagara Settlement as further discussed in Note 1 above, the
Niagara Note was settled in full, and a new note was issued in the
principal amount of $4,644,906, The note bears interest at 5% per
annum, matures in December 2019.
-14-
In April 2018, the
Company issued a senior secured convertible promissory note in the
amount of $2,250,000 to Red Beard in order to pay the initial
payment of the Niagara Settlement. Also in April, the Company sold
its remaining AquaBall® inventory to Red Beard for the
Purchase Price of $1,436,113. As payment for the Purchase Price,
the principal amount of the note was reduced by the Purchase Price,
resulting in approximately $814,000 owed to Red Beard under the
terms of the Red Beard Note as of April 5, 2018. The note bears interest at 5% per annum, matures
in December 2019 and is secured by a continuing security
interest in substantially all of the Company’s
assets.
Pursuant to the
terms of the Red Beard Note, Red Beard shall have the right, at its
sole option, to convert the outstanding balance due into that
number of fully paid and non-assessable shares of the
Company’s Common Stock equal to the outstanding balance
divided by $0.005 (the “Conversion Option”); provided, however, that the Company
shall have the right, at its sole option, to pay all or a portion
of the accrued and unpaid interest due and payable to Red Beard
upon its exercise of the Conversion Option in cash. Such Conversion
Option shall not be exercisable unless and until such time as the
Company has filed the Amendment with the Nevada Secretary of State.
The company recorded a beneficial conversion feature of the note in
the amount of $2,250,000. The amount is netted against the note
payable balance as a debt discount with the corresponding entry to
additional paid-in capital. The debt discount is amortized as
interest expense through the maturity date. During the three months ended June 30, 2018, a
total of $10,227 of the debt
discount was amortized and recorded as expense.
Secured Note Financing
As
disclosed in Note 3 above, on July 26, 2017, the Company commenced
an offering of Secured Notes in the aggregate principal amount of
up to $1.5 million to certain accredited investors. The amount
available was subsequently raised to $2.3 million. Between July 26,
2017 and June 30, 2018, the Company offered and sold Secured Notes
in the aggregate principal amount of $2,465,000 and issued warrants
to purchase up to 8,216,671 shares of Common Stock to participating
accredited investors. The warrants were valued at $127,466 and were
recorded as a discount to notes payable. During the three months
ended June 30, 2018, a total of $17,862 of the debt discount was
amortized and recorded as expense.
The Secured Notes (i) bear interest at a rate of
8% per annum, (ii) have a maturity date of 1.5 years from the date
of issuance, and (iii) are subject to a pre-payment and change in
control premium of 125% of the principal amount of the Secured
Notes at the time of pre-payment or change in control, as the case
may be. To secure the Company’s obligations under the Secured
Notes, the Company granted to participating investors a continuing
security interest in substantially all of the Company’s
assets pursuant to the terms and conditions of a Security Agreement
(the “Security
Agreement”).
In
addition, during the three months ended June 30, 2018, Red Beard
advanced the Company $191,350 to be used specifically to settle
certain accounts payable owing to certain creditors, including
Disney, and to provide funds to pay certain operating,
administrative and related costs to continue operations. As of June
30, 2018, the Company had settled $512,029 in accounts payable to
creditors, including Disney, in consideration for the payment to
such creditors of approximately $103,090. The terms of the advances
to the Company by Red Beard to finance the settlements, and to
allow the Company to continue as a going concern, are currently
being negotiated.
A
summary of the note payable as of June 30, 2018 and December 31,
2017 is as follows:
|
|
Amount
|
|
Outstanding, December 31, 2017
|
$2,803,610
|
|
Borrowings
on notes payable
|
415,000
|
|
Recording
of debt discount on secured notes
|
(250)
|
|
Amortization
of debt discount to interest expense
|
17,862
|
|
Outstanding March 31, 2018
|
3,236,222
|
|
Borrowings
on notes payable
|
2,441,350
|
|
Note
payable issued in exchange for accounts payable
|
3,790,540
|
|
Reduction
of note payable for the sale of inventory
|
(1,436,113)
|
|
Recording
of debt discount on secured notes
|
(2,250,000)
|
|
Derecognition
of debt discount
|
1,436,113
|
|
Amortization
of debt discount to interest expense
|
128,089
|
|
Outstanding June 30, 2018
|
$7,346,201
|
-15-
NOTE 5 — COMMITMENTS AND CONTINGENCIES
During
the quarter ended September 30, 2017, the Company moved its
corporate headquarters and entered into a new lease for the
facility, which lease was scheduled to expire on March 31, 2019.
Due to the Company’s financial condition and
management’s plan, the lease was terminated on May 11, 2018.
The Company is currently negotiating a fee of to be paid to the
lessor as consideration for the termination of the lease. Total
rent expense related to this and our previous operating lease for
the six months ended June 30, 2018 was $31,986. Management is
currently occupying office space located at 2 Park Plaza in Irvine
California, which the Company rents for $500 per
month.
Legal Proceedings
From time to time, claims are made against the
Company in the ordinary course of business, which could result in
litigation. Claims and associated litigation are subject to
inherent uncertainties, and unfavorable outcomes could occur. In
the opinion of management, the resolution of these matters, if any,
will not have a material adverse impact on the Company’s
financial position or results of operations. Other than as set
forth below, there are no additional pending or threatened legal
proceedings at this time.
Delhaize America
Supply Chain Services, Inc. v. True Drinks, Inc. On May 8, 2018, Delhaize America
Supply Chain Services, Inc. (“Delhaize”) filed a complaint
against the Company in the General Court of Justice Superior Court
Division located in Wake County, North Carolina alleging breach of
contract, among other causes of action, related to contracts
entered into by and between the two parties. Delhaize is seeking in
excess of $25,000 plus interest, attorney’s fees and costs.
We believe the allegations are
unfounded and are defending the case vigorously. We believe the
probability of incurring a material loss to be
remote.
NOTE 6 – FAIR VALUE MEASUREMENTS
The
application of fair value measurements may be on a recurring or
nonrecurring basis depending on the accounting principles
applicable to the specific asset or liability or whether management
has elected to carry the item at its estimated fair value. FASB ASC
820-10-35 specifies a hierarchy of valuation techniques based on
whether the inputs to those techniques are observable or
unobservable. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the
Company’s market assumptions. These two types of inputs
create the following fair value hierarchy:
-
Level
1: Observable inputs such as quoted prices in active
markets;
- Level
2: Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly; and
- Level
3: Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own
assumptions.
This
hierarchy requires the Company to use observable market data, when
available, and to minimize the use of unobservable inputs when
estimating fair value.
The Company assesses its recurring fair value
measurements as defined by FASB ASC 810. Liabilities measured at
estimated fair value on a recurring basis include derivative
liabilities. Transfers between fair value classifications occur
when there are changes in pricing observability levels. Transfers
of financial liabilities among the levels occur at the beginning of
the reporting period. There were no transfers
between Level 1, Level 2 and/or Level 3 during the six months ended
June 30, 2018. The Company had no Level 1 or 2 fair value
measurements at June 30, 2018 or December 31,
2017.
-16-
The
following table presents the estimated fair value of financial
liabilities measured at estimated fair value on a recurring basis
included in the Company’s financial statements as of June 30,
2018 and December 31, 2017:
|
|
|
Level 1
|
Level 2
|
Level 3
|
|
|
Total carrying value
|
Quoted market prices in active markets
|
Internal Models with significant observable market
parameters
|
Internal models with significant unobservable market
parameters
|
|
Derivative
liabilities – June 30, 2018
|
$3,492,017
|
$-
|
$-
|
$3,492,017
|
|
Derivative
liabilities – December 31, 2017
|
$8,337
|
$-
|
$-
|
$8,337
|
The
following table presents the changes in recurring fair value
measurements included in net loss for the six months ended
June 30, 2018 and 2017:
|
|
Recurring Fair Value Measurements
|
||
|
|
Changes in Fair Value
Included in Net Income
|
||
|
|
Other Income
|
Other Expense
|
Total
|
|
Derivative
liabilities – June 30, 2018
|
$6,270,623
|
$-
|
$6,270,623
|
|
Derivative
liabilities – June 30, 2017
|
$2,239,350
|
$-
|
$2,239,350
|
The
table below sets forth a summary of changes in the fair value of
our Level 3 financial liabilities for the six months ended
June 30, 2018:
|
|
December 31, 2017
|
Recorded New Derivative
Liabilities
|
Reclassification of Derivative Liabilities to Additional Paid in
Capital
|
Change in Estimated
Fair Value Recognized in Results of
Operations
|
June 30, 2018
|
|
Derivative
liabilities
|
$8,337
|
$9,754,303
|
$-
|
$(6,270,623)
|
$3,492,017
|
The
table below sets forth a summary of changes in the fair value of
our Level 3 financial liabilities for the six months ended
June 30, 2017:
|
|
December 31, 2016
|
Recorded New Derivative
Liabilities
|
Reclassification of Derivative Liabilities to Additional Paid in
Capital
|
Change in Estimated Fair Value Recognized in Results of
Operations
|
June 30, 2017
|
|
Derivative
liabilities
|
$5,792,572
|
$2,410,931
|
$(5,863,278)
|
$(2,239,350)
|
$100,875
|
-17-
NOTE 7 – LICENSING AGREEMENTS
We first entered into licensing agreements with
Disney Consumer Products, Inc. (“Disney”) and an 18-month licensing agreement with
Marvel Characters, B.V. (“Marvel”) (collectively, the
“Licensing
Agreements”) in 2012.
Each Licensing Agreement allowed us to feature popular Disney and
Marvel characters on AquaBall®
Naturally Flavored Water, allowing
AquaBall®
to stand out among other beverages
marketed towards children.
In March 2017, the Company and Disney entered
into a renewed licensing agreement, which extended the
Company’s license with Disney through March 31, 2019. The
terms of the Disney License entitle Disney to receive a royalty
rate of 5% on sales of AquaBall®
Naturally Flavored Water adorned with
Disney characters, paid quarterly, with a total guarantee of
$807,000 over the period from April 1, 2017 through March 31, 2019.
In addition, the Company is required to make a ‘common
marketing fund’ contribution equal to 1% of sales due
annually during the Disney License. As discussed in Note 1 above,
in connection with the Company’s discontinued production of
AquaBall®, the Company
notified Disney of the Company’s desire to terminate the
Disney License in early 2018. As a result of the Company’s decision to
discontinue the production of AquaBall® and terminate
the Disney License, and considering amounts due, Disney drew from a
letter of credit funded by Red Beard in the amount of $378,000 on
or about June 1, 2018. Subsequently, Disney and the Company agreed
to a settlement and release of all claims related to the Disney
License in consideration for the payment to Disney of
$42,000.
On August 22, 2015, the
Company and Marvel entered
into a renewed Licensing Agreement to extend the Company’s
license to feature certain
Marvel characters on bottles of AquaBall® Naturally
Flavored Water through December 31, 2017. The Marvel Agreement requires the Company to pay
to Marvel a 5% royalty rate
on sales of AquaBall® Naturally Flavored Water adorned with
Marvel characters, paid quarterly, through December 31, 2017, with
a total guarantee of $200,000 over the period from January 1, 2016
through December 31, 2017. The Company decided not to renew the Marvel
Agreement for another term. Thus, the Licensing Agreement expired
by its terms on December 31, 2017.
NOTE 8 – INCOME TAXES
The Company does not
have significant income tax expense or benefit for the six months
ended June 30, 2018 or 2017. Tax net operating loss carryforwards
have resulted in a net deferred tax asset with a 100% valuation
allowance applied against such asset at June 30, 2018 and 2017.
Such tax net operating loss carryforwards
(“NOL”) approximated
$52.0 million at June 30, 2018. Some or all of such NOL may be
limited by Section 382 of the Internal Revenue
Code.
The income tax effect of temporary differences between financial
and tax reporting and net operating loss carryforwards gives rise
to a deferred tax asset at June 30, 2018 and 2017 as
follows:
|
|
2018
|
2017
|
|
Deferred
tax asset –NOL’s
|
$10,900,000
|
$14,200,000
|
|
Less
valuation allowance
|
(10,900,000)
|
(14,200,000)
|
|
Net
deferred tax asset
|
$-
|
$-
|
NOTE 9 – SUBSEQUENT EVENTS
As
more particularly disclosed in Note 1 above, during the quarter
ended March 31, 2018, the Company’s Board of Directors
determined to discontinue the production of AquaBall®, to
terminate the Bottling Agreement with Niagara, and to sell all of
the Company’s remaining AquaBall® inventory to Red
Beard. These actions resulted in a reduction of $1.44 million in
the amount due and payable Red Beard under the Red Beard Note, as
more particularly disclosed in Note 1. In addition, Red Beard has
advanced the Company approximately $305,000 since December 31, 2017
to be used specifically to settle certain accounts payable owing to
certain creditors, including Disney, and to provide funds to pay
certain operating, administrative and related costs to continue
operations. As of September 18, 2018, the Company has settled
approximately $730,000 in accounts payable to creditors, including
Disney, in consideration for the payment to such creditors of
approximately $152,000. The terms of the advances to the Company by
Red Beard to finance the settlements, and to allow the Company to
continue as a going concern, are currently being
negotiated.
Management
has reviewed and evaluated subsequent events and transactions
occurring after the balance sheet date through the filing of this
Quarterly Report on Form 10-Q and determined that, except as
disclosed herein, no subsequent events occurred.
-18-
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains
“forward-looking” statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We intend
to identify forward-looking statements in this report by using
words such as “believes,” “intends,”
“expects,” “may,” “will,”
“should,” “plan,” “projected,”
“contemplates,” “anticipates,”
“estimates,” “predicts,”
“potential,” “continue,” or similar
terminology. These statements are based on our beliefs as well as
assumptions we made using information currently available to us. We
undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events, or otherwise. Because these statements reflect our
current views concerning future events, these statements involve
risks, uncertainties, and assumptions. Actual future results may
differ significantly from the results discussed in the
forward-looking statements. These risks include changes in demand
for our products, changes in the level of operating expenses, our
ability to expand our network of customers, changes in general
economic conditions that impact consumer behavior and spending,
product supply, the availability, amount, and cost of capital to us
and our use of such capital, and other risks discussed in this
report. Additional risks that may affect our performance are
discussed under “Risk Factors” in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2017.
The following discussion of the financial condition and results of
operations should be read in conjunction with the condensed
consolidated financial statements included elsewhere within this
Quarterly Report. Fluctuations in annual and quarterly results may
occur as a result of factors affecting demand for our products such
as the timing of new product introductions by us and by our
competitors and our customers’ political and budgetary
constraints. Due to such fluctuations, historical results and
percentage relationships are not necessarily indicative of the
operating results for any future period.
Overview
True Drinks
Holdings, Inc. (the “Company,” “us” or “we”) was incorporated in the state of Nevada
in January 2001 and is the holding company for True Drinks, Inc.
(“True Drinks”), a beverage company incorporated in the
state of Delaware in January 2012 that specialized in all-natural,
vitamin-enhanced drinks. Previously, our primary business was the
development, marketing, sale and distribution of our flagship
product, AquaBall® Naturally Flavored Water, a zero-sugar,
zero-calorie, preservative-free, vitamin-enhanced, naturally
flavored water drink. We distributed AquaBall® nationally
through select retail channels, such as grocery stores, mass
merchandisers, drug stores and online. Although,
as noted below, we have discontinued the production, distribution
and sale of AquaBall®, we continue to market and distribute Bazi® All
Natural Energy, a liquid nutritional supplement drink, which is
currently distributed online and through our existing database of
customers.
Our principal place of business is 2 Park Plaza,
Suite 1200, Irvine, California 92614. Our telephone number is (949)
203-3500. Our corporate website address is
http://www.truedrinks.com. Our common stock, par value $0.001 per
share (“Common
Stock”), is currently
listed for quotation on the OTC Pink Marketplace under the symbol
“TRUU.”
Recent Developments
Cessation of Production of AquaBall®, and Management’s
Plan
During
the first quarter of 2018, due to the weakness in the sale of the
Company’s principal product, AquaBall® Naturally
Flavored Water, and continued substantial operating losses, the
Company’s Board of Directors determined to discontinue the
production of AquaBall®, and, as set forth below, terminate
the bottling agreement by and between Niagara Bottling LLC, the
Company’s contract bottling manufacturer (“Bottler” or “Niagara”), and True Drinks (the
“Bottling
Agreement”). In addition, the Company notified Disney
Consumer Products, Inc. (“Disney”) of the Company’s
desire to terminate its licensing agreement with Disney
(“Disney
License”), pursuant to which the Company was able to
feature various Disney characters on each AquaBall® bottle. As
a result of management’s decision, and the Company’s
failure to pay certain amounts due Disney under the terms of the
Disney License, the Disney License terminated, and Disney claimed
amounts due of approximately $178,000, net of $378,000 drawn from
an irrevocable letter of credit posted in connection with the
execution of the Disney License. In addition, Disney sought
additional payments for minimum royalty amounts required to be paid
Disney through the remainder of the term of the Disney License. On
July 17, 2018 the Company and Disney entered into a settlement and
release whereby in exchange for a payment to Disney of $42,000, the
parties agreed to release each other from any and all claims
related to the Disney License.
-19-
In April 2018, the
Company sold its remaining AquaBall® inventory to Red Beard
Holdings, LLC (“Red
Beard”), the Company’s largest shareholder, for
an aggregate purchase price of approximately $1.44 million (the
“Purchase
Price”). As payment for the Purchase Price, the
principal amount of the senior secured convertible promissory note
issued to Red Beard by the Company in the principal amount of $2.25
million (the “Red Beard
Note”) was reduced by the Purchase Price, resulting in
approximately $814,000 owed to Red Beard under the terms of the Red
Beard Note as of April 5, 2018.
The
Company has reduced its staff to one employee, has taken other
steps to minimize general, administrative and other operating
costs, while maintaining only those costs and expenses necessary to
maintain sales of Bazi® and otherwise continue operations
while the Board of Directors and the Company’s principal
stockholder explore corporate opportunities, as more particularly
described below. Management has also worked to reduce accounts
payable by negotiating settlements with creditors, including
Disney, utilizing advances from Red Beard aggregating approximately
$305,000 since June 30, 2018, and is currently negotiating with its
remaining creditors to settle additional accounts
payable.
Management is
currently exploring, together with its largest shareholder,
available options to maximize the value of AquaBall® as well
as Bazi®, which may include entering into a license or similar
agreement with a third party to continue the production, marketing
and sale of AquaBall® and Bazi®. In addition, although no
assurances can be given, management is actively exploring, together
with its largest shareholder, opportunities to engage in one or
more strategic or other transactions that would maximize the value
of the Company as a fully reporting public operating company with a
focus on developing consumer brands,
as well as restructuring its preferred capital and indebtedness in
order to position the Company as an attractive candidate for such
transactions.
Termination of Bottling Agreement and Issuance of
Notes
On
April 5, 2018 (the “Effective Date”), True Drinks
settled all amounts due the Bottler under the terms of the Bottling
Agreement (the “Settlement”). As of the Effective
Date, the damage amount claimed by the Bottler under the Bottling
Agreement was $18,480,620, which amount consisted of amounts due to
the Bottler for product as well as amounts due for True
Drink’s failure to meet certain minimum requirements under
the Bottling Agreement (the “Outstanding Amount”).
Concurrently, an affiliate of Red Beard and the Bottler agreed to
terminate a personal guaranty of Red Beard’s obligations
under the Bottling Agreement in an amount not to exceed $10.0
million (the “Affiliate
Guaranty”) (the Bottling Agreement and the Affiliate
Guaranty are hereinafter referred to as the “2015 Agreements”).
Under
the terms of the Settlement, in exchange for the termination of the
2015 Agreements, the Bottler agreed to accept, among other things:
(i) a promissory note in the principal amount of $4,644,906 (the
“Principal
Amount”), with a 5% per annum interest rate, to be
compounded, annually (“Note
One”), (ii) a promissory note with a principal amount
equal to the Outstanding Amount (“Note Two”), and (iii) a cash
payment of $2,185,158 (the “Cash Payment”).
The
Principal Amount and all interest payments due under Note One shall
be due and payable to the Bottler in full on or before the December
31, 2019 (the “Note
Payment”). True Drinks, the Company and Red Beard are
each jointly and severally responsible for all amounts due under
Note One; provided,
however, that in the event of a Change in Control
Transaction, as defined in Note One, Red Beard will be the sole
obligor for any amounts due under Note One.
Note
Two shall have no force or effect except under certain conditions
and shall be reduced by any payments made to the Bottler under the
terms of the Settlement. True Drinks and the Company shall be
jointly and severally responsible for all amounts due, if any,
under Note Two, which shall automatically expire and terminate on
December 31, 2019.
In
consideration for the guarantee of the Company’s obligations
in connection with the Settlement, including as a joint and several
obligor under the terms of Note One, the Company is obligated to
issue Red Beard 348,367,950 shares of the Company’s Common
Stock (the “Shares”), which Shares shall be
issued at such time as the Company has amended its Articles of
Incorporation to increase the number of authorized shares of Common
Stock from 300.0 million to at least 2.0 billion (the
“Amendment”),
but in no event later than September 30, 2018. As a condition to
the Company’s obligation to issue the Shares, Red Beard
shall, and shall cause its affiliates to, execute a written consent
of shareholders to approve the Amendment, and to take such other
action as reasonably requested by the Company to effect the
Amendment.
-20-
In
connection with the Settlement, and in order to make the Cash
Payment described above, the Company issued the Red Beard Note to
Red Beard, which Red Beard Note accrues interest at a rate of 5%
per annum. In May 2018, as a result of the sale to Red Beard of the
Company’s remaining AquaBall® inventory, the principal
amount of the Red Beard Note was reduced by the Purchase
Price.
Pursuant to the
terms of the Red Beard Note, Red Beard shall have the right, at its
sole option, to convert the outstanding balance due into that
number of fully paid and non-assessable shares of the
Company’s Common Stock equal to the outstanding balance
divided by $0.005 (the “Conversion Option”); provided, however, that the Company
shall have the right, at its sole option, to pay all or a portion
of the accrued and unpaid interest due and payable to Red Beard
upon its exercise of the Conversion Option in cash. Such Conversion
Option shall not be exercisable unless and until such time as the
Company has filed the Amendment with the Nevada Secretary of
State.
All
outstanding principal and interest due under the terms of the Red
Beard Note shall be due and payable to Red Beard in full on or
before December 31, 2019 and is secured by a continuing security
interest in substantially all of the Company’s
assets.
Critical Accounting Polices and Estimates
Discussion
and analysis of our financial condition and results of operations
are based upon financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates; including those related
to collection of receivables, inventory obsolescence, sales returns
and non-monetary transactions such as stock and stock options
issued for services. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions. We believe there have been no changes to
our critical accounting policies subsequent to the filing of our
Annual Report on Form 10-K for the year ended December 31,
2017.
Comparison of the Three Months Ended June 30, 2018 to the Three
Months Ended June 30, 2017.
The
below disclosure included in this Management’s Discussion and
Analysis of Financial Condition discusses the Company’s
financial results for three months ended June 30, 2018 and 2017.
During the first quarter of 2018, management decided to cease
production of AquaBall® and significantly reduce business
operations. As a result of our decision to cease production of
AquaBall® and significantly reduce personnel during the first
quarter of 2018 and to terminate the Bottling Agreement and sell
our remaining AquaBall® inventory in the second quarter of
2018, the comparison to the comparable period in 2017, and amounts
reported in financial statements subsequent to June 30, 2018, will
materially change and will not be comparable with prior comparable
period.
Net Sales
Net
sales for the three months ended June 30, 2018 were $1,582,752,
compared with sales of $1,934,953 for the three months ended June
30, 2017, an 18% decrease. This decrease is the result of
management’s decision to cease sales of AquaBall® with
all remaining AquaBall® inventory being sold in the quarter
ending June 30, 2018.
The
percentage that each product category represented of our net sales
is as follows:
|
Product Category
|
Three Months Ended
June 30, 2018
(% of Sales)
|
|
AquaBall®
|
98%
|
|
Bazi®
|
2%
|
During the three months ended June 30, 2018, the
Company terminated the Bottling Agreement and ceased production
of AquaBall®. As a result, the Company has limited
continuing operations. Accordingly, total sales for the three
months ended June 30, 2018 are not indicative of future sales or
results. Specifically, we do not
anticipate material sales subsequent to the quarter ended June 30,
2018 in the absence of the consummation of a
transaction.
-21-
Gross Profit and Gross Margin
Gross profit for the three months ended June
30, 2018 was $719,282, compared to gross profit of $709,700 for the
three months ended June 30, 2017. Gross profit as a percentage of
revenue (gross margin) during the three months ended June 30, 2018
was 45%, compared to gross profit of 37% for the same period in
2017. This increase in gross
profit margin was a result of the sale of all remaining inventory
of AquaBall to Red Beard after management’s decision to cease
sales of AquaBall®. This sale was priced at
AquaBall®’s regular sales price, thus resulting in
greater gross margin.
Sales, General and Administrative Expense
Sales,
general and administrative expense was $10,131,806 for the three
months ended June 30, 2018, as compared to $3,094,996 for the three
months ended June 30, 2017. This period over period increase of
$7,036,810 is primarily the result of the recording of the fair
value of stock issuable to a related party the three months ended
June 30, 2018. These results are not indicative of future selling,
general and administrative expense, which expense is currently
anticipated to be substantially lower. The Company currently has
one employee, and currently anticipates limited expenditures in the
immediate future, consisting of those costs necessary to maintain
limited operations and to pay costs and expenses necessary to
comply with the reporting requirements under the Securities
Exchange Act of 1934, as amended.
Change in Fair Value of Derivative Liabilities
As of June 30, 2018, The Company has derivative
liabilities of $3,492,017. The Company recorded a change in the
fair value of these derivative liabilities of $6,270,623 for the
three months ended June 30, 2018. Last year, the Company recorded a
loss of $4,168 for the change in fair value of derivative
liabilities for the three months ended June 30,
2017.
Interest Expense
Interest
expense for the three months ended June 30, 2018 was $169,093, as
compared to interest expense of $24,432 for the three months ended
June 30, 2017.
Income Taxes
There
was no income tax expense recorded for the three months ended June
30, 2018 and 2017, as the Company’s calculated provision
(benefit) for income tax is based on annual expected tax rates. As
of June 30, 2018, the Company has tax net operating loss
carryforwards and a related deferred tax asset, offset by a full
valuation allowance.
Net Loss
Our
net loss for the three months ended June 30, 2018 was $3,086,841 as
compared to a net loss of $2,413,896 for the three months ended
June 30, 2017. This year-over-year increase of $672,945 consists of
a decrease in operating loss of approximately $2,920,962 million
due to management’s decision to cease production and sales of
AquaBall® and the corresponding reduction in personnel, as
well as selling, general and administrative expenses combined with
the net effects of recording non-cash items related to the issuance
of promissory notes and Common Stock related to the Niagara
Settlement. On a basic and diluted per share basis, our loss was
$0.01 per share for the three months ended June 30, 2018, as
compared to loss of $0.01 per share for the three months ended June
30, 2017.
We expect to continue to incur a net loss in subsequent
periods.
Comparison of the Six Months Ended June 30, 2018 to the Six Months
Ended June 30, 2017.
The
below disclosure included in this Management’s Discussion and
Analysis of Financial Condition discusses the Company’s
financial results for six months ended June 30, 2018 and 2017.
During the first six months ended June 30, 2018, management decided
to cease production of AquaBall® and significantly reduce
business operations , terminate the Bottling Agreement and sell all
remaining inventory of AquaBall®. As a result of our decision
to cease production of AquaBall® and significantly reduce
personnel during the first quarter of 2018, as well as our
termination of the Bottling Agreement and sale of all remaining
AquaBall® inventory in the second quarter of 2018, the
comparison to the comparable period in 2017, and amounts reported
in financial statements subsequent to June 30, 2018, will
materially change and will not be comparable with prior comparable
period.
-22-
Net Sales
Net
sales for the six months ended June 30, 2018 were $1,884,378,
compared with sales of $ 3,464,705 for the six months ended June
30, 2017, a 46% decrease. This decrease is the result of
management’s decision to cease sales of AquaBall® with
all remaining AquaBall® inventory being sold in the quarter
ending June 30, 2018.
The
percentage that each product category represented of our net sales
is as follows:
|
Product Category
|
Six Months Ended
June 30, 2018
(% of Sales)
|
|
AquaBall®
|
94%
|
|
Bazi®
|
6%
|
During the six months ended June 30, 2018, the
Company terminated the Bottling Agreement and ceased production
of AquaBall®. As a result, the Company has limited
continuing operations. Accordingly, total sales for the six months
ended June 30, 2018 are not indicative of future sales or
results. Specifically, we do not
anticipate material sales subsequent to the quarter ended June 30,
2018 in the absence of the consummation of a
transaction.
Gross Profit and Gross Margin
Gross profit for the six months ended June
30, 2018 was $711,403, compared to gross profit of $1,265,840 for
the six months ended June 30, 2017. Gross profit as a
percentage of revenue (gross margin) during the six months ended
June 30, 2018 was 38%, compared to gross profit of 37% for the same
period in 2017. This increase
in gross profit margin was a result of the sale of all remaining
inventory of AquaBall to Red Beard after management’s
decision to cease sales of AquaBall®. This sale was priced at
AquaBall®’s regular sales price, thus resulting in
greater gross margin.
Sales, General and Administrative Expense
Sales,
general and administrative expense was $11,180,945 for the six
months ended June 30, 2018, as compared to $6,096,435 for the six
months ended June 30, 2017. This period over period increase of
$5,084,510 is primarily the result of the recording of the fair
value of stock issuable to a related party. These results are not
indicative of future selling, general and administrative expense,
which expense is currently anticipated to be substantially lower.
The Company currently has one employee, and currently anticipates
limited expenditures in the immediate future, consisting of those
costs necessary to maintain limited operations and to pay costs and
expenses necessary to comply with the reporting requirements under
the Securities Exchange Act of 1934, as amended.
Change in Fair Value of Derivative Liabilities
As of June 30, 2018, The Company has
derivative liabilities of $3,492,017. The Company recorded a change
in the fair value of these derivative liabilities of $6,270,623 for
the six months ended June 30, 2018. Last year, the Company recorded
a gain of $2,239,350 for the change in fair value of
derivative liabilities for the six months ended June 30,
2017.
Interest Expense
Interest
expense for the six months ended June 30, 2018 was $233,360, as
compared to interest expense of $44,917 for the six months ended
June 30, 2017.
Income Taxes
There
was no income tax expense recorded for the six months ended June
30, 2018 and 2017, as the Company’s calculated provision
(benefit) for income tax is based on annual expected tax rates. As
of June 30, 2018, the Company has tax net operating loss
carryforwards and a related deferred tax asset, offset by a full
valuation allowance.
-23-
Net Loss
Our
net loss for the six months ended June 30, 2018 was $3,799,226 as
compared to a net loss of $2,684,170 for the six months ended June
30, 2017. This year-over-year increase of $1,115,056 consists of a
decrease in operating loss of approximately $4,115,356 million due
to management’s decision to cease production and sales of
AquaBall® and the corresponding reduction in personnel, as
well as selling, general and administrative expenses combined with
the net effects of recording non-cash items related to the issuance
of promissory notes and Common Stock related to the Niagara
Settlement. On a basic and diluted per share basis, our loss was
$0.02 per share for the six months ended June 30, 2018, as compared
to loss of $0.02 per share for the six months ended June 30,
2017.
We expect to continue to incur a net loss in subsequent
periods.
Liquidity and Capital Resources
Our
auditors have included a paragraph in their report on our
consolidated financial statements, included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2017, indicating
that there is substantial doubt as to the ability of the Company to
continue as a going concern. The accompanying condensed
consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America, which contemplates continuation of the Company as a
going concern. For the six months ended June 30, 2018, the Company
had a net loss of $3,799,226, negative working capital of
$6,292,891, and an accumulated deficit of $52,040,575.
Although, during the year ended December 31, 2017
and the six months ended June 30, 2018, the Company raised
approximately $12.8 million from financing activities, including
sale of shares of Series D Convertible Preferred Stock, as well as
certain Senior Secured Promissory Notes, additional capital is
necessary to advance the marketability of the Company’s
products to the point at which the Company can sustain operations.
Management is currently exploring, together with
its largest
shareholder, available options
to maximize the value of AquaBall® as well as Bazi®,
which may include entering into a license or similar agreement with
a third party to continue the production, marketing and sale of
AquaBall® and
Bazi®. In addition, although
no assurances can be given, management and the Company’s
largest shareholder are exploring opportunities to consummate one
or more transactions that would maximize the value of the
Company as a fully reporting public operating company with a focus
on developing consumer brands.
The
accompanying condensed consolidated financial statements do not
include any adjustments that will result in the event the Company
is unsuccessful in securing the capital necessary to execute our
business plan.
The
Company has historically financed its operations through sales of
equity and debt securities, and, to a lesser extent, cash flow
provided by sales of its products. Despite recent sales of
preferred stock and the issuance of Senior Secured Promissory
Notes, funds generated from sales of our securities and cash flow
provided by sales are insufficient to fund our operating
requirements for the next twelve months. As a result, we require
additional capital to continue operating as a going concern. No
assurances can be given that we will be successful. In the
event we are unable to obtain additional financing, we will not be
able to fund our working capital requirements, and therefore will
be unable to continue as a going concern.
Capital Raising Activity
Series D Offering and Warrant
Exchange. On February 8, 2017,
the Company and certain accredited investors entered into
Securities Purchase Agreements, for the private placement of up to
50,000 shares of Series D Convertible Preferred Stock
(“Series D
Preferred”) for $100 per
share. As additional consideration for participation in the private
placement, investors received warrants to purchase up to 200% of
the shares of Common Stock issuable upon conversion of shares of
Series D Preferred purchased, with an exercise price of $0.15 per
share (the “Series D
Financing”).
-24-
During
2017, the Company issued an aggregate total of 45,625 shares of
Series D Preferred, as well as warrants to purchase up to an
aggregate total of 60,833,353 shares of Common Stock. The issuance
of the shares of Series D Preferred during the year ended December
31, 2017 resulted in gross proceeds to the Company of $4.56
million. Each warrant issued during the Series D Financing contains
a price protection feature that adjusts the exercise price in the
event of certain dilutive issuances of securities. Such price
protection feature is determined to be a derivative liability and,
as such, the value of all such warrants issued during the fiscal
year, totaling $2,627,931, was recorded to derivative
liabilities.
Warrant Exchange.
Beginning on February 8, 2017, the
Company and certain holders of outstanding Common Stock purchase
warrants (the “Outstanding
Warrants”), entered into
Warrant Exchange Agreements, pursuant to which each holder agreed
to cancel their respective Outstanding Warrants in exchange for
one-half of a share of Common Stock for every share of Common Stock
otherwise issuable upon exercise of Outstanding
Warrants.
During
the year ended December 31, 2017, the Company issued 79,023,138
shares of Common Stock in exchange for the cancellation of
158,080,242 Outstanding Warrants.
Secured Note
Financing. On July 26,
2017, we commenced an offering of Senior Secured Promissory Notes
(the “Secured Notes”) in the aggregate principal amount of up
to $1.5 million to certain accredited investors (the
“Secured Note
Financing”). The amount
available was subsequently raised to $2.3 million. As additional
consideration for participating in the Secured Note Financing,
investors received five-year warrants, exercisable for $0.15 per
share, to purchase that number of shares of our Common Stock equal
to 50% of the June 30, 2018, we offered and sold Secured Notes in
the aggregate principal amount of $2,465,000 and issued Warrants to
purchase up to 8.2 million shares of Common Stock to participating
investors.
The Secured Notes (i) bear interest at a rate of
8% per annum, (ii) have a maturity date of 1.5 years from the date
of issuance, and (iii) are subject to a pre-payment and change in
control premium of 125% of the principal amount of the Secured
Notes at the time of pre-payment or change in control, as the case
may be. To secure the Company’s obligations under the Secured
Notes, the Company granted to participating investors a continuing
security interest in substantially all of the Company’s
assets pursuant to the terms and conditions of a Security Agreement
(the “Security
Agreement”).
2018 Note Issuance.
During the three months ended June 30,
2018, in connection with the
Settlement with Niagara, and in order to make the Cash Payment, the
Company issued to Red Beard a senior secured convertible promissory
note (the “Red
Beard Note”) in the
principal amount of $2.25 million, which was subsequently reduced
to $813,887 in connection with the sale to Red Beard of all of the
Company’s remaining AquaBall® inventory. The Red Beard Note
accrues interest at a rate of 5% per annum. Pursuant to the terms
of the Red Beard Note, Red Beard shall have the right, at its sole
option, to convert the outstanding balance due into that number of
fully paid and non-assessable shares of the Company’s Common
Stock equal to the outstanding balance divided by 0.005 (the
“Conversion
Option”); provided,
however, that the Company
shall have the right, at its sole option, to pay all or a portion
of the accrued and unpaid interest due and payable to Red Beard
upon its exercise of the Conversion Option in cash. Such Conversion
Option shall not be exercisable unless and until such time as the
Company has amended its Articles of Incorporation to increase the
number of authorized shares of Common Stock from 300.0 million to
at least 2.0 billion.
All outstanding
principal and interest due under the terms of the Red Beard
Note shall be due and
payable to Red Beard in full on or before December 31, 2019. All
amounts due under the Red Beard Note shall
be secured by a continuing
security interest in substantially all of the Company’s
assets, as set forth in the Security Agreement entered into by and
between the Company and Red Beard.
Off-Balance Sheet Items
We
had no off-balance sheet items as of June 30, 2018.
-25-
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A smaller reporting company is not required to provide the
information required by this item.
ITEM 4. CONTROLS
AND PROCEDURES
|
(a)
|
Evaluation of disclosure controls and procedures.
|
We maintain disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange
Act”)) that are designed
to ensure that information required to be disclosed in our periodic
reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
rules and forms of the SEC, and that this information is
accumulated and communicated to our management, including our
principal executive and financial officers, to allow timely
decisions regarding required disclosure.
Our
management, with the participation and supervision of our Principal
Executive Officer and Principal Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. In
designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. In addition,
the design of disclosure controls and procedures must reflect the
fact that there are resource constraints and that management is
required to apply its judgment in evaluating the benefits of
possible controls and procedures relative to their
costs.
Based
on that evaluation, our Principal Executive Officer and Principal
Financial Officer concluded that our disclosure controls and
procedures were not effective based on our material weakness in the
form of (i) lack of segregation of duties, (ii) the outsourcing of
our external accounting, administrative and compliance staff, both
of which stem from our limited capital resources to hire staff to
provide these duties, and (iii) the absence of internal staff with
extensive knowledge of SEC financial and GAAP reporting. As a
result of the lack of executive finance and accounting personnel
within the Company, internal controls related to preparation and
review of the Company’s financial statements and related
disclosures were not adequate.
|
(b)
|
Changes in internal controls over financial reporting.
|
The
Company’s Principal Executive and Financial officer
determined that there have been no changes, in the Company’s
internal control over financial reporting during the period covered
by this report identified in connection with the evaluation
described in the above paragraph that have materially affected, or
are reasonably likely to materially affect, Company’s
internal control over financial reporting.
-26-
PART II
ITEM 1. LEGAL
PROCEEDINGS
From time to time, claims are made against the
Company in the ordinary course of business, which could result in
litigation. Claims and associated litigation are subject to
inherent uncertainties, and unfavorable outcomes could occur. In
the opinion of management, the resolution of these matters, if any,
will not have a material adverse impact on the Company’s
financial position or results of operations. Other than as set
forth below, there are no additional pending or threatened legal
proceedings at this time.
Delhaize America
Supply Chain Services, Inc. v. True Drinks, Inc. On May 8, 2018, Delhaize America
Supply Chain Services, Inc. (“Delhaize”) filed a complaint
against the Company in the General Court of Justice Superior Court
Division located in Wake County, North Carolina alleging breach of
contract, among other causes of action, related to contracts
entered into by and between the two parties. Delhaize is seeking in
excess of $25,000 plus interest, attorney’s fees and costs.
We believe the allegations are
unfounded and are defending the case vigorously. We believe the
probability of incurring a material loss to be
remote.
ITEM 1A. RISK FACTORS
Our results of operations and financial condition
are subject to numerous risks and uncertainties described in our
Annual Report on Form 10-K for our fiscal year ended December 31,
2017, filed on June 26, 2018. You should carefully consider these
risk factors in conjunction with the other information contained in
this Quarterly Report on Form 10-Q. Should any of these risks
materialize, our business, financial condition and future prospects
will be negatively impacted, as they have as a result of
management’s determination to discontinue the
production of AquaBall® and terminate the bottling agreement
by and between Niagara Bottling LLC, the Company’s contract
bottling manufacturer and True Drinks.
As of June 30, 2018, there have been no material changes to the
disclosures made in the above-referenced Form
10-K.
ITEM 2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY
DISCLOSURES
Not
applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
|
(a)
|
|
EXHIBITS
|
|
|
Certification of the Principal Executive Officer and Principal
Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the
Exchange Act
|
|
|
|
Certification by the Principal Executive Officer and Principal
Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
101.INS
|
|
XBRL Instance Document
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
-27-
In
accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
Date: September 24, 2018
|
|
TRUE DRINKS HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Robert Van
Boerum
|
|
|
|
|
|
|
Robert Van Boerum
Principal Executive Officer and
Principal Financial Officer
|
|
|
|
|
|
|
|
|
|
-28-